Amaravati: The Andhra Pradesh High Court on Thursday suspended state Power Generation Corporation's order terminating a contract with Navayuga Engineering Company for the Polavaram Hydro-Electric Project (PHEP), and also directed that the process for entrustment of the project to any third party be stopped.

Justice D V S S Somayajulu noted that the termination of the contract was not in accordance with the settled principles of law.

The judge also found fault with AP Genco, saying its action was not in accordance with the terms of the contract.

"As an instrumentality of the state, Genco should have been a model employer and should have scrupulously followed the terms and conditions of the contract and also the rules of natural justice while terminating the contract," he said in an interim order.

The order was delivered on a petition filed by Navayuga challenging termination of the PHEP contract.

Navayuga entered into the contract with Genco on December 20, 2017 for building the PHEP (12x80 MW) at a cost of Rs 322.28 crore.

The Telugu Desam Party (TDP) dubbed the high court order a "slap" on the face of Chief Minister Y S Jagan Mohan Reddy but the government maintained that the only intention behind the contract's termination was to save public money by unearthing corruption involved in the Polavaram project.

State Water Resources Minister P Anil Kumar Reddy said they would honour the court order and take appropriate action accordingly.

On August 1, the Jagan Mohan Reddy government decided to terminate the contract awarded to Navayuga for execution of the Polavaram dam head works.

On August 14, the AP Genco issued the termination order to Navayuga on the hydro-electric project, citing lack of progress in works.

The state government issued a reverse tender last week inviting fresh bids for the hydro power station and the Polavaram head works.

Navayuga challenged Genco's order, related only to the hydro power station, contending that, as per the contract, it has time till November 2021 for completing the project.

On hearing arguments of the petitioner and the state government, Justice Somayajulu issued interim orders suspending Genco's termination order.

Reacting to the high court order, Leader of Opposition N Chandrababu Naidu said it would have a severe impact on the progress of Polavaram project as a whole and cause inordinate delay in execution.

"What will the government say to this now? Despite the Centre's warning, the state government is not appreciating the reality. We have been cautioning against indiscriminate actions too," the former chief minister told reporters in an informal chat here.